Will this acquisition help out Baidu.com, Inc. (ADR) (NASDAQ:BIDU), or is it simply Baidu’s attempt at plastering a Band-aid over a large, festering wound? I believe that in the short-term, this acquisition is simply covering up larger problems in Baidu’s current business model; but in the long-term, the PPStream deal will assist Baidu in its efforts to shift its overall strategy to keep up with the fast pace of market movements.
Baidu blues
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is absolutely dominant in the search engine market in China. However, the stock has been hammered over the past year, recently hitting 52-week lows. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has had to face the music of the consumer market in China moving en masse to mobile platforms, as opposed to the traditional desktop computer which Baidu specializes in. The emergence of Qihoo as a competitor is certainly not helping out matters either. Qihoo has slowly started to grab more market share away from Baidu, which decreases Baidu’s revenue.
Baidu now has to deal with new challenges that could eat away at its market share and longtime position as the widely recognized leader of Chinese search engines. Other companies like Qihoo 360 Technology Co Ltd (NYSE:QIHU) are ratcheting up their games, thus making life a little more difficult for Baidu.com, Inc. (ADR) (NASDAQ:BIDU).
Youku blues
However, Baidu isn’t the only Chinese internet tech company in hot water. Youku Tudou Inc (ADR) (NYSE:YOKU) has also been struggling to gain traction. Youku Tudou Inc (ADR) (NYSE:YOKU) has not been able to turn a profit ever since being listed on the New York Stock Exchange, bleeding cash profusely while trying to get a foothold. The stock of Youku Tudou Inc (ADR) (NYSE:YOKU) has followed suit, tumbling precipitously for quite some time. The company is, however, China’s current leading video provider and might be in a better position to capitalize on China’s expanding mobile market than Baidu…until now.
Right back at Youku!
So, how does Baidu’s new purchase factor in to the raging Chinese search engine wars? Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is seemingly seeking to continue copying upon the proven successes of Google Inc (NASDAQ:GOOG). After all, as the oft-repeated maxim states, “if it ain’t broke, don’t fix it.” Baidu and Google Inc (NASDAQ:GOOG) were both built upon similar business models, and that model has been quite lucrative. Baidu is emulating Google, which owns YouTube, in seeking to be a video streaming company. Google Inc (NASDAQ:GOOG) is currently searching for a way to monetize YouTube — but Baidu might be able to leapfrog that process entirely and start off with monetizing PPStream rather quickly.
In the short-term, the PPStream acquisition will most likely be used as a “bargaining chip” for Baidu investors to look away from its current weaknesses, and still hold on to the stock in anticipation for potential gains. It will take time for Baidu to integrate into video streaming, so the company does not need an investor panic or sellout on its hands while trying to stage a comeback.
Long-term, the landmark issue with the PPStream acquisition is Baidu’s becoming legitimate competition to rival Youku Tudou. By building from the ground up upon video offerings through its iQiyi and PPS.tv services, Baidu can pose a serious threat to the success of Youku. Online video advertisement revenue, as well as possibly paid subscriptions or promotional deals, can make a nice chunk of change for Baidu — and those dollars would not be heading into Youku Tudou Inc (ADR) (NYSE:YOKU)‘s coffers.
Another impact of Baidu.com, Inc. (ADR) (NASDAQ:BIDU)‘s acquisition will be its competitive advantage over Qihoo 360 Technology Co Ltd (NYSE:QIHU). Qihoo is a software development company well known for its antivirus computer programs. It recently jumped in to the Chinese search engine market. Baidu, on the other hand, is the established “big boy” in the search engine market. Qihoo 360 Technology Co Ltd (NYSE:QIHU) has revealed some kinks in Baidu’s armor, but, by getting PPStream, Baidu has gained a competitive advantage over Qihoo in the quest for more revenue.
The bottom line
Fortunately, by making a move to jump in to the video sharing market, Baidu seems to realize that it needs to do a better job of promoting itself to smartphone and tablet users in China. By marketing itself as a Chinese version of Google’s YouTube or potentially even a Chinese Netflix, Baidu can help gain back ground it has lost to Qihoo 360 Technology Co Ltd (NYSE:QIHU) and curtail the growth of Youku Tudou Inc (ADR) (NYSE:YOKU). Short-term, this move is a Band-aid diversion for Baidu and its shareholders. But long-term, this acquisition might bear fruit for Baidu and be the bane of both Qihoo 360 Technology Co Ltd (NYSE:QIHU) and Youku Tudou.
The article Competition Heats Up in the Chinese Internet Industry originally appeared on Fool.com and is written by Evan Buck.
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